May 2019 Amendments – Economic Law

CA FINAL LAW 1.1

AMENDMENTS for May 2019

for NEW & OLD syllabus both
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018
Vide Notification dated 17th August, 2018, Ministry of Law and Justice here by amended the Insolvency and
Bankruptcy Code, 2016 through the enforcement of the Insolvency and Bankruptcy Code (Second Amendment)
Act, 2018.With the enforcement of this Amendment Act, the Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2018 have been repealed. This amendment Act is effective from 6th June, 2018.

Definitions

'(5A) "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate
debtor;’

after clause (24), the following clause shall be inserted, namely:

'(24A) "related party", in relation to an individual, means—
a) a person who is a relative of the individual or a relative of the spouse of the individual;
b) a partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the
individual is a partner;
c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms
of the trust confers a power on the trustee which may be exercised for the benefit of the individual;
d) a private company in which the individual is a director and holds along with his relatives, more than two per
cent. of its share capital;
e) a public company in which the individual is a director and holds along with relatives, more than two per cent.
of its paid-up share capital;
f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business,
acts on the advice, directions or instructions of the individual;
g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of
business, act on the advice, directions or instructions of the individual;
h) a person on whose advice, directions or instructions, the individual is accustomed to act;
i) a company, where the individual or the individual along with its related party, own more than fifty per cent.
of the share capital of the company or controls the appointment of the board of directors of the company
Explanation: For the purposes of this clause,—
(a) "relative", with reference to any person, means anyone who is related to another, in the following manner,
namely:
(i) members of a Hindu Undivided Family, (xi) granddaughter's daughter and son,
(ii) husband, (xii) brother,
(iii) wife, (xiii) sister,
(iv) father, (xiv) brother's son and daughter,
(v) mother, (xv) sister's son and daughter,
(vi) son, (xvi) father's father and mother,
(vii) daughter, (xvii) mother's father and mother,
(viii) son's daughter and son, (xviii)father's brother and sister,
(ix) daughter's daughter and son, (xvix)mother's brother and sister, and
(x) grandson's daughter and son,

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Application of corporate insolvency resolution process by financial creditor (Section 7)

1.2 (a) Filing of application before adjudicating authority:
(i) A financial creditor either by itself or jointly with other financial creditors other financial creditors, or any
other person on behalf of the financial creditor, as may be notified by the Central Government may file
an application for initiating corporate insolvency resolution process against a corporate debtor before the
Adjudicating Authority when a default has occurred.
(ii) A default includes a default in respect of a financial debt owed not only to the applicant financial creditor
but to any other financial creditor of the corporate debtor.

Application for initiation of corporate insolvency resolution process by operational creditor

(Section 9)
Providing of documents/ information:
The operational creditor shall, along with the application furnish the following documents—
(i) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the
corporate debtor;
(ii) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the
unpaid operational debt;
(iii) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor
confirming that there is no payment of an unpaid operational debt by the corporate debtor if available;
(iv) a copy of any record with information utility confirming that there is no payment of an unpaid operational
debt by the corporate debtor, if available; and (IBC, 2018)
(v) any other proof confirming that there is no payment of an unpaid operational debt by the corporate debtor
or such other information, as may be prescribed. (IBC, 2018)

Initiation of corporate insolvency resolution process by corporate applicant (Section 10)

(a) Commission of default:
Where a corporate debtor has committed a default, the corporate applicant thereof may file an application for
initiating corporate insolvency resolution process with the Adjudicating Authority

(b) Furnishing of information

The corporate applicant shall, along with the application, furnish: (IBC, 2018)
(a) the information relating to its books of account and such other documents for such period as may be specified;
(b) the information relating to the resolution professional proposed to be appointed as an interim resolution
professional; and
(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least
three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of
the application

(c) Admission/rejection of application:

The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—
(i) admits the application, if it is complete and no disciplinary proceeding is pending against the proposed
resolution professional (IBC 2018); or
(ii) rejects the application, if it is incomplete or any disciplinary proceeding is pending against the proposed
resolution professional (IBC 2018):
Provided that Adjudicating Authority shall, before rejecting an application, gives a notice to the applicant to rectify
the defects in his application within seven days from the date of receipt of such notice from the Adjudicating
Authority

Time-limit for completion of insolvency resolution process (Section 12) (ICAI)

(a) Period for completion of insolvency process:
The corporate insolvency resolution process shall be completed within a period of 180 days from the date of
admission of the application to initiate such process.
(b) Filing of application for extension of period:

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The resolution professional shall file an application to the Adjudicating Authority to extend the period of the
corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed at a meeting
of the committee of creditors by a vote of 75% 66% of the voting shares. (IBC 2018) 1.3
(c) Period of extension:
On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such
that corporate insolvency resolution process cannot be completed within 180 days, it may by order extend the
duration but not exceeding 90 days.
Extension can only be granted once.

Withdrawal of application admitted under section 7, 9, or 10 (Sec 12A) (IBC 2018)

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or
section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the
committee of creditors, in such manner as may be specified.

Moratorium (Section 14) (ICAI)

Prohibited Acts: (IBC 2018)
The provisions of sub-section (1) shall not apply to—
(a) such transaction as may be notified by the Central Government in consultation with any financial regulator.
(b) a surety in a contract of guarantee to a corporate debtor

Appointment, tenure and Power of interim resolution professional (Section 16)

(b) Term of appointment (IBC 2018)
The term of the interim resolution professional shall continue till the date of appointment of the resolution
professional under section 22.

Powers of Interim Resolution Professional (Section 17)

(d) Instructions to financial institutions: (IBC 2018)
The IRPro be responsible for complying with the requirements under any law for the time being in force on behalf
of the corporate debtor.

Committee of creditors (Section 21)

1) As per the Section 21 of the Code, the interim resolution professional shall after collection of all claims
received against the corporate debtor and determination of the financial position of the corporate debtor,
constitute a committee of creditors:
2) The committee of creditors shall comprise of all financial creditors of the corporate debtor.
Provided that a financial creditor or the authorised representative of the financial creditor referred to in
sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate
debtor shall not have any right of representation, participation or voting in a meeting of the committee of
creditors. (IBC 2018)
Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector
regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt
into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.
(IBC 2018)
3) Where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium
or agreement, each such financial creditor shall be part of the committee of creditors and their voting share
shall be determined on the basis of the financial debts owed to them.
4) Where any person is a financial creditor as well as an operational creditor,
 such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor,
and shall be included in the committee of creditors, with voting share proportionate to the extent of
financial debts owed to such creditor;
 such person shall be considered to be an operational creditor to the extent of the operational debt owed
by the corporate debtor to such creditor.

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5) Where an operational creditor has assigned or legally transferred any operational debt to a financial
creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such
1.4 assignment or legal transfer.
6) Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility or
issued as securities provide for a single trustee or agent to act for all financial creditors, each financial creditor
may—
(a) authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting
share;
(b) represent himself in the committee of creditors to the extent of his voting share;
(c) appoint an insolvency professional (other than the resolution professional) at his own cost to represent
himself in the committee of creditors to the extent of his voting share; or
(d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or
severally.
(6A) Where a financial debt (IBC 2018)—
(a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a
trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent
shall act on behalf of such financial creditors;
(b) is owed to a class of creditors exceeding the number as maybe specified, other than the creditors covered
under clause (a) or sub-section (6), the interim resolution professional shall make an application to the
Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency
professional, other than the interim resolution professional, to act as their authorised representative who
shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors;
(c) is represented by a guardian, executor or administrator, such person shall act as authorised representative
on behalf of such financial creditors, and such authorised representative under clause (a) or clause (b) or
clause (c) shall attend the meetings of the committee of creditors, and vote on behalf of each financial
creditor to the extent of his voting share.
(6B) The remuneration payable to the authorised representative (IBC 2018)—
(i) under clauses (a) and (c) of sub-section (6A), if any, shall be as per the terms of the financial debt or the
relevant documentation; and
(i) under clause (b) of sub-section (6A) shall be as specified which shall form part of the insolvency resolution
process costs.
(ii) (iv) for sub-sections (7) and (8), the following sub-sections shall be substituted, namely

7) The Board may specify the manner of voting and the determining of the voting share in respect of financial
debts covered under sub-sections (6) and (6A). (IBC, 2018)
8) Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote
of not less than fifty-one per cent. of voting share of the financial creditors:
Provided that where a corporate debtor does not have any financial creditors, the committee of creditors
shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be
specified. (IBC, 2018)
9) The committee of creditors shall have the right to require the resolution professional to furnish any financial
information in relation to the corporate debtor at any time during the corporate insolvency resolution process.
10) The resolution professional shall make available any financial information so required by the committee of
creditors within a period of seven days of such requisition.
11) The first meeting of the committee of creditors shall be held within seven days of the constitution of the
committee of creditors. (Section 22)

Appointment and functions of resolution professional (Section 22)

According to Section 22 of the Code, the committee of creditors, may, in the first meeting, by a majority vote of
not less than 75 % 66% of the voting share of the financial creditors, either resolve to appoint the interim
resolution professional as a resolution professional or to replace the interim resolution professional by another
resolution professional. (IBC, 2018)

Functions of Resolution professional (Section 23)

Section 23 states the following functions of resolution professional-

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(a) The resolution professional shall conduct the entire corporate insolvency resolution process and manage
the operations of the corporate debtor during the corporate insolvency resolution process period.
Provided that the resolution professional shall, if the resolution plan under sub-section (6) of section 30 has been 1.5
submitted, continue to manage the operations of the corporate debtor after the expiry of the corporate insolvency
resolution process period until an order is passed by the Adjudicating Authority under section 31. (IBC 2018)

Replacement of resolution professional by committee of creditors (Section 27)

Section 27 provides manner of replacement of resolution professional with another resolution professional by
committee of creditors. Process of replacement of resolution professional is as follows:
(a) Committee of creditors
If COC is of the opinion that a resolution professional as appointed, is required to be replaced, it may replace him
with another resolution professional.
(b) By majority: (IBC 2018)
The committee of creditors may, at a meeting, by a vote of sixty-six per cent. of voting shares, resolve to replace
the resolution professional appointed under section 22 with another resolution professional, subject to a written
consent from the proposed resolution professional in the specified form.

A person shall not be eligible to submit a resolution plan (Sec 29A) (IBC, 2017)
if such person, or any other person acting jointly or in concert with such person—
a) is an undischarged insolvent;
b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking
Regulation Act, 1949;
c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under
the management or control of such person or of whom such person is a promoter, classified as non-
performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking
Regulation Act, 1949 or the guidelines of a financial sector regulator issued under any other law for the time
being in force and at least a period of one year has lapsed from the date of such classification till the date of
commencement of the corporate insolvency resolution process of the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all
overdue amounts with interest thereon and charges relating to non-performing asset accounts before
submission of resolution plan;
Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a
financial entity and is not a related party to the corporate debtor.

d) has been convicted for any offence punishable with imprisonment—

(i) for two years or more under any Act specified under the Twelfth Schedule; or
(ii) for seven years or more under any other law for the time being in force:
Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his
release from imprisonment:
Provided further that this clause shall not apply in relation to a connected person referred to in clause (iii) of
Explanation I

e) is disqualified to act as a director under the Companies Act, 2013;

Provided that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation.

f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities
markets;
g) has been a promoter or in the management or control of a corporate debtor in which a preferential
transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken
place and in respect of which an order has been made by the Adjudicating Authority under this Code;
Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit
transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the
resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan
approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed
to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction.

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h) has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which
1.6 an application for insolvency resolution made by such creditor has been admitted under this Code;
i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
j) has a connected person not eligible under clauses (a) to (i)

Explanation: For the purposes of this clause, the expression "connected person" means—
(i) any person who is the promoter or in the management or control of the resolution applicant; or
(ii) any person who shall be the promoter or in management or control of the business of the corporate
debtor during the implementation of the resolution plan; or
(iii) the holding company, subsidiary company, associate company or related party of a person referred to in
clauses (i) and (ii):
Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a
financial entity and is not a related party of the corporate debtor:
Provided further that the expression "related party" shall not include a financial entity, regulated by a financial
sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor
solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity
shares, prior to the insolvency commencement date.

'Explanation II—For the purposes of this section, "financial entity" shall mean the following entities which meet
such criteria or conditions as the Central Government may, in consultation with the financial sector regulator,
notify in this behalf, namely:
(a) a scheduled bank;
(b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector
regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force
Standards and is a signatory to the International Organisation of Securities Commissions Multilateral
Memorandum of Understanding;
(c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a
foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of
the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2017 made under the Foreign Exchange Management Act, 1999.
(d) an asset reconstruction company registered with the Reserve Bank of India under section 3 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(e) an Alternate Investment Fund registered with the Securities and Exchange Board of India;
(f) such categories of persons as may be notified by the Central Government.'.

Approval of resolution plan adjudicating authority (Sec 31)

1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors
meets the requirements, it shall by order approve the resolution plan which shall be binding on the corporate
debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution
plan.
Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this
sub-section, satisfy that the resolution plan has provisions for its effective implementation.
2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements,
it may, by an order, reject the resolution plan.
3) After the order of approval of resolution plan—
 the moratorium order passed by the Adjudicating Authority shall cease to have effect; and
 the resolution professional shall forward all records relating to the conduct of the corporate insolvency
resolution process and the resolution plan to the Board to be recorded on its database.

4) The resolution applicant shall, pursuant to the resolution plan approved under sub-section (1), obtain the
necessary approval required under any law for the time being in force within a period of one year from the date
of approval of the resolution plan by the Adjudicating Authority under sub-section (1) or within such period as
provided for in such law, whichever is later:

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Provided that where the resolution plan contains a provision for combination, as referred to in section 5 of the
Competition Act, 2002, the resolution applicant shall obtain the approval of the Competition Commission of India
under that Act prior to the approval of such resolution plan by the committee of creditors. (IBC, 2018) 1.7

© CA Darshan D. Khare